Correlation Between Davis Government and Gateway Equity

Can any of the company-specific risk be diversified away by investing in both Davis Government and Gateway Equity at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Davis Government and Gateway Equity into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Davis Government Bond and Gateway Equity Call, you can compare the effects of market volatilities on Davis Government and Gateway Equity and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Davis Government with a short position of Gateway Equity. Check out your portfolio center. Please also check ongoing floating volatility patterns of Davis Government and Gateway Equity.

Diversification Opportunities for Davis Government and Gateway Equity

0.3

Correlation Coefficient

Davis Government  Gateway Equity

Weak diversification

The 3 months correlation between Davis and Gateway is 0.3. Overlapping area represents the amount of risk that can be diversified away by holding Davis Government Bond and Gateway Equity Call in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Gateway Equity Call and Davis Government is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on Davis Government Bond are associated (or correlated) with Gateway Equity. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Gateway Equity Call has no effect on the direction of Davis Government i.e., Davis Government and Gateway Equity go up and down completely randomly.

Pair Corralation between Davis Government and Gateway Equity

Assuming the 90 days horizon Davis Government Bond is expected to generate 0.22 times more return on investment than Gateway Equity. However, Davis Government Bond is 4.46 times less risky than Gateway Equity. It trades about 0.14 of its potential returns per unit of risk. Gateway Equity Call is currently generating about -0.07 per unit of risk. If you would invest  511.00  in Davis Government Bond on December 2, 2024 and sell it today you would earn a total of  2.00  from holding Davis Government Bond or generate 0.39% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	100.0%
Values	Daily Returns

Davis Government Bond  vs.  Gateway Equity Call

Davis Government Bond

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Davis Government Bond are ranked lower than 11 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Davis Government is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Gateway Equity Call

Risk-Adjusted Performance

Very Weak

Over the last 90 days Gateway Equity Call has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong fundamental indicators, Gateway Equity is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Davis Government and Gateway Equity

The main advantage of trading using opposite Davis Government and Gateway Equity positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Davis Government position performs unexpectedly, Gateway Equity can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in Gateway Equity will offset losses from the drop in Gateway Equity's long position.

The idea behind Davis Government Bond and Gateway Equity Call pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

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Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.